Although trade diplomacy has been in vogue for a while, it has gained greater significance since Donald Trump got elected US President in late 2016. Trump is hardly diplomatic when he rails against multilateralism under the pretext of “fair trade”. But his tough talk with countries, which have significant trade surplus, into buying more US products is apparently working (case in point: Nafta revision).
Though Pakistan is in no position to take a leaf from Trump’s muscular playbook on trade, the new government ought to pay attention to chief sources of Pakistan’s trade deficit and see what can be done to reduce the gap that has to be financed majorly through external debt.
The root of Pakistan’s perennial macroeconomic imbalance lies in declining share of exports its GDP and the resulting high trade deficit. Put together the past five fiscals and one sees that Pakistan had to spend over $100 billion (!) to finance the trade deficit (data source: SBP). It may be an accident, but countries contributing highly and consistently to Pakistan’s external woes happen to be close friends and allies.
Right on top is China, which accounted for 31 percent of Pakistan’s $31 billion trade deficit in FY18. (China had a 27 percent share in the deficit between FY14 and FY18). The 2007 Pak-China FTA is the oft-cited bogey behind this imbalance. Some independent observers, however, refer to limited results achieved by Pakistan’s trade diplomats and a lack of awareness on part of the Pakistani businessmen in understanding the standards and tastes of the Chinese market.
But another reality is that trade deficit with China worsened fivefold since CPEC arrived on-stage. Higher machinery and materials imports for infrastructure and energy projects almost broke the camel’s back by FY18. Now an effort is underway, blessed by the Chinese government, to review Pak-China FTA, with the intent to buy more Pakistani goods. This time, one hopes the government would get some concessions. There are also high hopes from the Special Economic Zones envisaged under CPEC.
Next up is the GCC region. Pakistan’s two major trading partners in this region – UAE and Saudi Arabia – together accounted for 33 percent of Pakistan’s trade deficit in FY18. (The five-year average is 41%). Collectively, UAE and Saudi Arabia collected $10.26 billion from Pakistan last fiscal – half a billion dollars more than China’s haul that year.
Pakistan’s crude oil purchases from these two countries explain the high trade deficits it runs with them. But Pakistan also lost the opportunity to grow its exports, especially in sectors of food commodities, light-engineering goods and textiles, to these two oil-dependent economies. What’s more, exports to these two countries have fallen in double digits. In the last five fiscals, exports fell by 37 percent to Saudi Arabia (FY18: $317 mn) and by 20 percent to UAE (FY18: $1.4 bn).
The third major drain runs down to the ASEAN nations. Led by Singapore and supported in equal measure by Thailand, Indonesia and Malaysia, this region gathered $6.5 billion in FY18 – 21 percent of Pakistan’s trade total deficit that year (five-year average: 27%). Economic relationship with Singapore, which alone scored a surplus of over $4 billion last fiscal with Pakistan, needs to be paid attention to.
Amid this, Pakistan is running significant trade surplus with the West and some regional players. In FY18, Pakistan had a trade surplus of $1.8 billion with the US, $766 million with the UK, and $729 million with Spain. In the region, Pakistan has valuable surplus with Afghanistan ($1.3 bn) and Bangladesh ($660 mn) The country will do well to keep its relationships with the West, especially the US, as well as with the region, on a positive trajectory if it wishes to continue to have this breathing room in its external trade.
Given the scale of external challenges, the new government, which is not short of pro-industry and pro-export voices, must make trade diplomacy the cornerstone of its foreign policy. Of course, a lot more needs to be done internally to revive exports. But that’s no reason to ignore trade diplomacy that needs to be undertaken by competent civil servants and professionals.